Insanity On All Fronts Except Global Wall Street As The Bulls Back Off In Front Of The Weekend: The Action For October 27, 2023

Carnage and suffering dominate the Times’ upper fold this morning and point to an unwritten underlying cause of pervasive insanity among individuals and institutions. For the bears this is painful reminder of the insanity of the rally this year, as bad news on many fronts was disregarded in favor of belief in profit growth despite all obstacles. To date that growth has been elusive, and the S&P 500 likely falls over the near term, but I expect the correction to end soon as strong economic data convince the bulls to double up earnings growth after 4 quarters of declines.

The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:

• S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.

• EPS Estimates: In the last week Wall Street analysts lowered profits forecasts for many firms in the S&P 500.

• Geopolitical Issues: Developments around Israel and the broader Middle East are a clear negative for equities.

As earnings season climaxes the number of bearish factors has decreased substantially while the action yesterday and overnight reveal the same bullish factors that will soon flip the markets around, including:

• Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.

• Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.